Drop in peso leaves investors asking whether the unwinding of hugely popular ‘carry trades’ will continue
A sharp drop in Mexico’s currency after a landslide election result has shaken foreign exchange markets as far as Hungary and Turkey this week, leaving investors asking whether the unwinding of hugely popular “carry trades” will continue.
Pockets of volatility remained on Wednesday, with the yen falling sharply against the dollar, leaving investors to consider whether the old approach is still viable. The twin drops caused wild swings across emerging markets, knocking other favoured currencies such as Hungary’s forint and the Turkish lira. Low-yielding “funding currencies” like the yen and peso rallied, while the euro and dollar bounced around in the ripples.
Yet some spy an opportunity. “With the peso-yen cross having fallen 6.3% in two days, we ask if the shakeout has largely played out and if this is a time to re-engage,” said Chris Weston, head of research at Pepperstone. “That trade feels aggressive, but let’s see how Japanese traders play the yen moves today.”Investors will have to gauge a whole host of factors when deciding whether to return to carry trade strategies.
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